Tuesday, July 14, 2015

Indonesia holds rate, 'upbeat' on 2015 inflation target

Indonesia's central bank kept its benchmark BI rate steady at 7.50 percent and said it "remains upbeat that the inflation target for 2015 of 4 percent, plus/minus 1 percentage point will be achieved."
Bank Indonesia (BI), which cut its rate by 25 basis points in February, added that inflationary pressures in June were less intense than previously thought with the annual inflation rate in June at 7.26 percent, up from 7.15 percent in May while core inflation was 5.04 percent.
In June BI merely said that it was confident of meeting its inflation target for 2015.
In today's statement the BI board of governors underlined that its decision to maintain an accommodative policy stance was taken to maintain macroeconomic stability "despite widespread global uncertainty" and "intense" risks on global financial markets from uncertainty surrounding a rise in U.S. interest rates, the crises in Greece and stock price shocks in China.
Economic growth in Indonesia is expected to remain "limited" in the second quarter but then rebound in the third quarter as infrastructure projects are implemented and banks extend more lending, BI said, confirming its expectations from June.
For 2015 BI has said it expects growth of 5.0 to 5.4 percent. In the first quarter annual growth slowed to 4.71 percent - the slowest rate in more than five years - from 5.01 percent in the fourth quarter of last year.
Indonesia's rupiah has been depreciating against the U.S dollar since April 2014 and in June declined by an average of 1.28 percent to 13,311 a dollar, the BI said, attributing most of the depreciation to external factors linked to concerns over the Greek debt restructuring negotiations along with investors' anticipation of the Federal Reserve's policy direction.
Demand for foreign exchange to repay debt and to make seasonal dividend payments in the second quarter exacerbated pressures on the rupiah, the BI said, adding that it will continue to "maintain rupiah stability in line with its fundamental value."
The rupiah was trading at 13,297 to the dollar today, down 6.5 percent this year.

Bank Indonesia issued the following statement:

"The BI Board of Governors decided on 14th July 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending Facility rate at 8.00%. The decision is congruent with efforts to control inflation within the target corridor of 4±1% in 2015 and 2016. The policy mix of Bank Indonesia is consistently directed towards maintaining macroeconomic stability, despite widespread global uncertainty, as well as preserving growth through accommodative macroprudential policy.Furthermore, Bank Indonesia constantly strengthens policy coordination with the government in terms of inflation control and expedites fiscal stimuli in order to catalyse economic growth. In addition, Bank Indonesia supports central and local government efforts to accelerate budget realisation, including infrastructure projects, while persevering with a variety of structural reforms as the key to a sounder domestic economic outlook.

Global growth remained towards the lower end of the previous projection amidst ubiquitous uncertainty blighting global financial markets. Weaker-than-expected growth stemmed from economic moderation in China along with flagging US economic indicators. Despite early signs of improvement, US economic projections were revised down on weak first quarter actuals, coupled with sluggish exports and investment. In addition, uncertainty regarding the expected FFR hike in the United States persisted. Economic moderation endured in China despite early signs of improving monetary indicators in line with the looser policy stance adopted. In contrast, the economy of Europe rallied as domestic demand surged amidst the undulations of the ongoing crisis in Greece. The sluggish global economy perpetuated sliding international commodity prices despite a gradual increase in the oil price.On global financial markets, uncertainty concerning the proposed FFR hike and the crisis in Greece as well as stock price shocks in China demonstrated that risks on global financial markets remain intense.

On the home front, domestic growth was projected to remain limited in the second quarter but then rebound thereafter in the third. Households were inclined to consume less as confidence ebbed, which was reflected by declining automotive and retail sales. In addition, central and local government spending also remained low, precipitating limited investment growth in line with delayed infrastructure realisation and weak investment in machinery and transportation equipment. Externally, limited export growth was projected due to an inauspicious global economy and persistently low international commodity prices. Moving forward, Bank Indonesia predicts economic growth to improve during the second semester of 2015 as infrastructure projects are implemented and banks extend more lending.

The Indonesia trade balance recorded a surplus again in June, predominantly due to a non-oil and gas surplus. The trade surplus improved the current account deficit in Q2/2015, which was projected at around 2.5% of GDP, improving on the 3.9% of GDP reported in the same period of the previous year. In terms of the financial account, foreign capital inflows surged despite global financial markets steeped in uncertainty. Accumulatively, foreign portfolio inflows to Indonesian financial markets up to June 2015 totalled US$4.7 billion. Consequently, the position of foreign exchange reserves at the end of June 2015 was US$108.0 billion, equivalent to 7.0 months of imports or 6.8 months of imports and servicing public external debt, which is well in excess of the international adequacy standard of three months.

The rupiah depreciated primarily on external factors. In June 2015, the rupiah depreciated by an average of 1.28% (mtm) to a level of Rp13,311 per US dollar. Externally, the rupiah was influenced by concerns over Greek restructuring negotiations as the deadline approached along with investor anticipation of the policy direction pursued by the Federal Reserve at the FOMC meeting in June 2015. Internally, growing demand for foreign exchange to repay debt and make seasonal dividend payments in the second quarter exacerbated pressures on the rupiah. Moving forward, Bank Indonesia will continue to maintain rupiah stability in line with its fundamental value, thereby bolstering macroeconomic and financial system stability.

Inflationary pressures were less intense in June 2015 than previously thought. CPI inflation was recorded at 0.54% (mtm) or 7.26% (yoy) in June 2015. Consequently, headline inflation during the first semester of 2015 was kept low at just 0.96% (ytd). Core inflation was relatively controlled at 0.26% (mtm) or 1.99% (ytd) and 5.04% (yoy) in line with well-anchored inflation expectations. Based on actual inflation through to June 2015, Bank Indonesia remains upbeat that the inflation target for 2015 of 4±1% will be achieved.

Financial system stability was solid, underpinned by a resilient banking system and stable financial market performance. The banking industry remained resilient with credit, liquidity and market risks mitigated. A robust Capital Adequacy Ratio (CAR) persisted in May 2015, at 20.3%, well above the minimum 8% threshold. Meanwhile, non-performing loans (NPL) remained low and stable at 2.6% (gross) or 1.4% (net). In terms of the intermediation function, credit growth achieved 10.4% (yoy), relatively unchanged from the previous period. On the other hand, deposit growth at the end of May 2015 was 12.5% (yoy). Future credit growth is predicted to accelerate on the back of escalating economic activity and looser macroprudential policy instituted by Bank Indonesia."